Every business owner wants a successful exit, whether via M&A or IPO. With the gift of hindsight, we are often asked why deals succeed or fail. Having completed more than a few over the years as founders, owners and advisors, we thought that sharing some insights might help to demystify the process.

So, here goes! We break our insights down into three deal phases: (1) pre-launch; (2) during the deal; and (3) post-deal.

1. PRE-LAUNCH

Let’s start with the 5P’s: Prior Preparation Prevents Pretty Poor Performance (there’s a racier version, but we will spare you that, for now). Translated this means - do your homework and don’t launch until you’re ready!

The baseline is that the parties who will consider buying your company kick hundreds of tyres each year, and they know quality when they see it. They can sniff out a business that has its act together versus one that doesn’t.  As a rule, the more you impress, the better the likelihood that you will sell your business to them for an impressive price. Conversely, the less impressive your business, the less impressive the price. That means engendering confidence in everything you do. The forecasts, the data room, your key documents, meeting your budgets, your strategy, your execution, your growth rate, even in the way you present – all the planets need to align. Your most important job as founder during this period is to get transaction ready. Find out how ready your business is here.

 

We can quote countless examples of ill-prepared founders and business owners launching deals that failed. For example, our FinTech client in a frontier market who had tried to do a deal several times failed each time, using a different advisor. The pattern was always the same – no deal strategy, financial accounts not ready, forecasts moving around too much to engender confidence, basic data room materials not in place, etc. The client went through several advisors until we agreed to get him properly ready for sale. As they say, everyone should be allowed to make a mistake once, but if you make the same mistake over and over again…

 

Another client had a young tech business, small in scale but with strong revenue and earnings growth. The founder was the sole shareholder of this boot-strapped company. We worked closely with her prior to launch and throughout the deal, however the founder had an unshakeable belief that her start-up was worth at least $30m – all of it payable in full, up front. We thought it was worth much less. After a rocky start we negotiated up from the initial offer of $15m in cash plus a $5m earnout to $25m in cash plus a further $10m in a three-year earnout. The founder declined the offer and the deal wasn’t done.

 

Our founder’s hard line position was by no means unique. Most vendors (well… almost all of you!) have lofty aspirations when it comes to valuation. Rule #1 before you embark on your mission – form a consensus view on what the business is worth before you launch. If you don’t, we can almost guarantee that you’ll be disappointed or at worst, fail to conclude a deal after putting up to a year’s time, effort, and cost, not to mention the risk of tarnishing your brand. Everyone knows that a failed raising or sale creates an odour that makes it harder next time round.

 

While we’re at it, you should also think about defining your vision before starting the sale process. Make sure that everyone in your shop can speak with like-mind about what your company does, where you’re going, and why. When we spoke extensively with the Chairman of one of the world’s major media acquirers he kept repeating “what’s your elevator pitch?”. Translation: he would never acquire a business unless the whole team could repeat an agreed simple pitch, and were all rowing their boat in the same direction. Our vendor couldn’t, and the buyer walked immediately.

 

In a similar vein, we once acted for two friends who had both founded tech businesses and often spoke of collaborating with each other. Their businesses were in the same sector, had complementary product offerings, with a good overlap of both existing and targeted customers, and some obvious synergies. On paper, it was a sensible deal with tangible benefits, however, upon stress-testing, the two founders were both strong-willed personalities, and couldn’t agree who would be the CEO. There wasn’t a crystal clear alignment of vision, individual roles and responsibilities, and strategy, and the deal fell over before it really got started.

 

2. DURING THE DEAL

Once you’re ready to launch your deal, running it effectively is critical. That means making sure your buyer universe is well aware of the deal and ready to go, launching a virtual data room enabling you to control who sees what, tailoring your process to the circumstances and being able to change the rules of the game as you see fit as vendor – particularly focusing on keeping the illusion of competition going (whether there’s competition or not!).

 

The art of the deal contains many elements but by far the most important elements are – make sure you have a unique value proposition to offer, and make sure the asset is (or at least appears) sought after.

 

When we are the major shareholder in a company, or if we are engaged to sell a client’s company, we tend to market to our strategic buyer universe well ahead of launching a deal. Buyers who know, trust and like the vendor are more likely to buy. As the seller, you should understand how they have valued and financed acquisitions in the past, and know their balance sheet and valuation metrics in detail.

 

We once ran the $80m sale of a stock exchange listed software company. Knowing we had only one genuine strategic buyer, and no strong private equity interest, we nonetheless ran a sale process designed for multiple private equity buyers, all the while negotiating solely with the strategic buyer. This created sufficient FOMO (fear of missing out) that the strategic buyer bid the price up from below $10 per share to nearly $30 per share, even though there were no other buyers. We knew that at $30 per share the deal was still highly accretive to the buyer after synergies, so felt justified in taking a hard line on price. Afterwards, the bidder informed us it was one of the best deals it had ever done, despite having to pay up. Naturally of course, the company being sold was extremely happy.

 

Another smaller client had an early mover advantage and a unique proprietary tech platform in a rapidly emerging category. This platform was attractive to large corporates lacking the internal competencies, capability and time to develop a meaningful presence in a global marketplace. Initial acquirer interest was strong; however, offers were low as bidders thought the company was too early in its commercialisation phase. Again, we ran a good process and FOMO drove fiercely competitive bidding, with the ultimate acquirer increasing its offer by 3x the original bid of $14m, to ~$42m. As advisor, we provided sufficient rationale to substantiate forecast growth and created bidder tension to drive a higher acquisition price.

 

We’ve also acted for buyers where we have managed to leverage the fact that there were no other bidders for an asset. In one transaction where all of us around the table knew our client was the only bidder, our client wrote a cheque for $630m for a 25% shareholding in a business while negotiating complete veto rights over the target’s business plan, board appointments, capex etc., thus gaining effective control with only a 25% shareholding. That wouldn’t have happened with a competitor at the table.

 

A word of caution. No amount of competition can deliver value if the company misfires during a sale. We often have our hearts in our mouths asking bidders to increase their offers, hoping that our clients manage to maintain their earnings forecasts. If you underperform versus target during a sale, watch buyers lose interest and/or reduce their price. We were selling a software company recently when this occurred. Asset withdrawn from sale.

 

This is a trap that companies often fall into when they try to save money and sell their companies without external assistance. Underestimating the time it takes, founders end up becoming their own investment bankers, focusing on the deal, taking their eye off the business, and in particular, off sales momentum. Not a good formula for success.

             

3. POST-DEAL 

To state the obvious, a deal isn’t a deal … until it’s done! Don’t count your chickens before they hatch, especially if you have signed a conditional deal.

 

We have advised companies in sale processes where buyers have exercised a MAC (material adverse change clause) during a market disruption, wriggling off the hook. We have sold companies for shares, only to have the post-deal share price fall away. We have signed deals where earnings have fallen after a sale agreement has been signed, only to result in a price reduction. Unless your sale price is substantially in cash, and there are no conditions to be fulfilled, your deal isn’t done.

 

We once entered a merger agreement between two publicly listed eCommerce companies. It was a marriage from heaven. But Company A, which had agreed to acquire Company B, didn’t cement the deal by buying a blocking stake in Company B. Along, unexpectedly, came Company C which acquired a 20% blocking stake and launched a takeover offer at a higher price. Guess who won - Company C took home the prize. We sold the asset for a much higher price – around 50% – so didn’t mind at the time.

 

Earnouts are potentially the trickiest and least dependable part of any deal. As a rule, we don’t like them, and we see many fail. They are used to entice vendors to sell into the lure of a higher ultimate price than is offered on day one, but often they don’t meet their promise.

 

We once sold a software company to another business but had no post-sale control over operations. The CEO of the acquirer did everything possible to torpedo earnings and deny us any upside from the earn-out. As a rule, if you give control but cannot influence operations post-deal, your earn-out will probably fail.

 

Another client was a profitable market leader in its segment, with strong revenue growth. The founder wanted to sell. Following strong acquirer interest, two bidders contested the bid, with the final deal agreed at $24m ($20m cash on closing plus $4m from a two year earnout). While post-acquisition integration was initially collaborative, within 12 months issues began to surface. The founder did not agree with many of the changes being made to her business, did not like the new corporate culture, and was distracted by her newfound personal wealth. The earnout failed and the founder exited the business and moved on with life.

 

By contrast, we also sold a successful marketplace to a large acquirer, to whom we had previously sold several media and technology businesses. Transaction consideration included a substantial upfront payment and a deferred payment based on company performance and an agreed integration plan. Given the disparity in size and resources between the acquirer and acquiree, the founder was concerned about his ability to negotiate integration issues within the larger corporate, which could materially affect the performance of his earnout. To mitigate his valid concern, we agreed on the formation of an Integration Committee during the 12 month integration phase, to provide objective oversight and balance. This structure helped ensure contentious issues were properly reviewed, negotiated and concluded with mutual agreement. Ultimately, the integration and earnout were successfully completed and both parties were satisfied.

 

Conclusions

Successful M&A doesn’t just happen by simply executing a deal – it is made up of critical components before, during, and after the sale transaction. To recap on just a few of the rules:

 

Before: Prior Preparation Prevents Pretty Poor Performance. Get transaction-ready: agree what the business does, define your vision and objectives before you launch, form a realistic view on valuation, get your basic materials available and reach out to bidders to make sure they’re interested.

 

During: A competitive process delivers results, but make sure your earnings hold up and don’t count your chickens before they hatch.

 

After: Cash is king. A sale of shares isn’t a sale until you’ve sold them for cash. Earnouts are tricky, so structure them intelligently to protect your own interests.

 

Finally, some must-read materials as you prepare for your journey:

 

· North Ridge Partners transaction-ready diagnostic

· How to get your business ready faster through our Deal Accelerator

 

 

Co-authored by Michael Gethen, Fiona Robertson, and Roger Sharp

September 2020

 

  

Note: To preserve confidentiality, deal names have been anonymised and share prices and values modified